Change-Point Analysis of Asset Price Bubbles with Power-Law Hazard Function

We present a methodology to identify change-points in financial markets where the governing regime shifts from a constant rate-of-return, i.e. normal growth, to superexponential growth described by a power-law hazard rate. The latter regime corresponds, in our view, to financial bubbles driven by herding behaviour of market participants. Assuming that the time series of log-price returns of a financial index can be modelled by arithmetic Brownian motion, with an additional jump process with power-law hazard function to approximate the superexponential growth, we derive a threshold value of the hazard-function control parameter, allowing us to decide in which regime the market is more likely to be at any given time. An analysis of the Standard \& Poors 500 index over the last 60 years provides evidence that the methodology has merit in identifying when a period of herding behaviour begins, and, perhaps more importantly, when it ends

Quantitative or momentum-based multi-style rotation? UK experience

The objective of this article is to examine whether short-term variation in the ranking of size and style index returns in the UK equity market is better predictable and exploitable by means of quantitative or momentum style-rotation strategies. Using UK index data, we assess the profitability of a number of long-only and long/short multi-stylerotation strategies based on these two alternative methods. The findings suggest that trading rules based on simple short-term momentum strategies are able to generate higher Sharpe ratios and greater end-of-period wealth at a reasonable level of transaction costs than our quantitatively based trading rules. This result is particularly pronounced among the long-only strategies

Why are convertible bond announcements associated with increasingly negative issuer stock returns? An arbitrage-based explanation

While convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of −1.69%, convertible announcement effects over the period 2000–2008 are more than twice as negative (−4.59%). We hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long-only investors towards convertible arbitrage funds. These funds buy convertibles and short the underlying stocks, causing downward price pressure. Consistent with this hypothesis, we find that the differences in announcement returns between the Traditional Investor period (1984–1999) and the Arbitrage period (2000–September 2008) disappear when controlling for arbitrage-induced short selling associated with a range of hedging strategies. Post-issuance stock returns are also in line with the arbitrage explanation. Average announcement effects of convertibles issued during the Global Financial Crisis are even more negative (−9.12%), due to a combination of short-selling price pressure and issuer, issue, and macroeconomic characteristics associated with these offerings

Wealth effects of convertible-bond and warrant-bond offerings: a meta-analysis

The literature on wealth effects associated with the announcements of convertible-bond and warrant-bond offerings is reviewed. The findings of 35 event studies, which include 84 sub-samples and 6310 announcements, are analysed using meta-analysis. We find a mean cumulative abnormal return of −1.14% for convertibles compared with −0.02% for warrant bonds, the significant difference confirming a relative advantage for warrant bonds. Abnormal returns for hybrid securities issued in the USA are significantly more negative than those issued in other countries. In addition, issuing hybrid securities to refund debt does not seem to be favoured by investors. Finally, several factors identified as important by theory or in prior research are not significant within our cross-study models, suggesting that more evidence is needed to confirm whether they are robust

NWI Index: July 2014 Release

In July the Northwest Indiana Coincident Index rose 0.2 points from 138.8 to 139.0. This growth continues a trend of expansion and recovery that is slower than the national economy. The forecast for economic growth over the next six months remains optimistic with moderate growth of 1-2%